Posted by: gppn | 13/11/2009

Economic Reforms – IMF Response to the Two Crises

Presentation: IMF Responses to the Two Crises – Asia ‘97 and Global ’08

Speakers: Ina Kunikawa and Vandy Leng, Tokyo University, Japan

Moderator: Aneliya Nazirova (LKYSPP) – Rapporteur: Naomi Jacob (LKYSPP)


Appropriateness of IMF policies in addressing the two crises (IMF recommendations for 1997 were not relevant to the cause of the crisis, while recommended actions for 2008 were apt); compare IMF-supported program for non-euro European countries (e.g. Iceland, Hungary) under the current global crisis. The cases examined were those of Korea, Indonesia, Iceland and Hungary.


The presentation examined certain indicators of IMF Policy such as Structural Conditionality, Fiscal Policy, Monetary Policy and Capital Control and compared the use of these tools in the Asian Currency Crisis and in the non-Euro countries of Iceland and Hungary.

The findings can be summarized as follows:

Structural Conditionalities

  • Higher during the Asian currency crisis than in the global financial crisis (ex. Indonesia -141 conditionalities while Hungary – 20 conditionalities
  • Asian Crisis 1997: The conditionality was not quite related to the major cause of crisis (ex. a request to close the banks in Indonesia in 1997 crisis)
  • Financial Crisis 2008: The conditionality was more relevant to the cause of the crisis: banking sector restructuring and fiscal sustainability framework and capital injection to the main three banks in Iceland, for example.

Fiscal Policy

  • The IMF requirement for fiscal policy during Asian crisis was too tight, even though Asian countries had better macro environments than Eastern Europe countries. Asian countries had less external debt and central government debt than Eastern Europe. The Asian countries and Hungary had less than 10% current account, but Iceland had larger CA balance
  • IMF required 3% fiscal adjustment for Thailand, 1% for Korea and 2% for Indonesia. Iceland was allowed to conduct a fiscal relaxation and Hungary was required 2.4% fiscal adjustment.
    • Fiscal tightening was severer in Asian countries than in Eastern Europe countries

Monetary Policy

  • Asian countries took higher interest rate policy under the IMF-supported program, compared to Iceland and Hungary. For example, in Indonesia, the interest rate skyrocketed to its highest level of 80%
    • For Iceland and Hungary, the IMF did not require the interest rate to be that high.
    • In both cases, depreciation seems to have stopped although the authority did not raise interest rate so high.

Capital Controls

  • Capital Controls were also not supported during the Asian Crisis as in the case of Malaysia. On September 1998, Malaysia became the first Asian countries affected by the Asian crisis to announce temporary capital controls without IMF-supported Program. Successful in controlling capital outflows, reducing further depreciation of Ringgit.
  • Capital Controls have been implemented since the beginning of IMF-supported program( end of October, 2008). In line with high policy interest rate, capital controls in Iceland help to prevent a further sharp decline in the krona.

Solutions and Strategies

Structural Conditionality

  • Facilitate the process of providing funds to the recipient countries
  • Ensure that conditionality imposed be relevant to critical issues of crisis

Fiscal Policy

  • The extent of fiscal deficit could accelerate the crisis: need to have a close watch on fiscal sustainability

Monetary Policy

  • When economy recovers, high interest rate policy should be withdrawn as soon as possible.

Capital Controls

  • Though capital controls seem to have worked in both Malaysia and Iceland, further adoption should be strictly considered.

Questions and Answers

On the solutions for Monetary Policy, what are the indicators to evaluate whether an economy has already “recovered”? Prolonged maintenance of low interest rates were criticized in the US, thus isn’t it a good thing that interest rates were high here?

Macro-economic indicators such as GDP growth, inflation

Is IMF really the lender of the last resort? How can it improve its efficiency?

IMF: does not have the capacity to be lender of last resort; does not have enough funding; could not address the need for increased liquidity of borrowing countries during the crises
To improve efficiency: increase funding for IMF so that it can be an effective lender of last resort

What are incentives to the IMF to reform its processes and procedures (i.e. irrelevant economic prescriptions which worsened instead of improved economic growth in some countries – Latin America)?

Competition is a form of incentive. There are other funding sources for countries – non-traditional donors like China and India.
Current IMF reforms involve assigning more technical staff to partner countries so that they can better understand local context in designing packages/conditionalities.


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